Agri Business

How India carried out a ‘surgical strike’ to ban wheat exports

Subramani Ra Mancombu | | Updated on: May 16, 2022

Operation was carried out late on Friday evening as the government waited for the US banks to close

The Indian government planned “meticulously” and “strategically” to ban the export of wheat late on May 13 (Friday) evening, which some term a “surgical strike”.

When the news broke out early on May 14 morning that the Centre has banned wheat exports with immediate effect, it caught everyone by surprise — from media to exporters to traders to even government officials. 

It was a “deliberate“ decision to implement the export ban late on Friday evening. 

A few precautions were taken which resulted in government officials incharge of making the order public could return home on Saturday morning only.

Grim global food outlook

One of the main reasons for the government to ban wheat exports is the grim global food situation ahead in view of the Russia-Ukraine war continuing and showing no signs of ending soon. 

Russia and Ukraine account for 30 per cent of the global supply and the war has brought shipments to a halt. The war has also led to other consequences such as rising prices of crude, commodities and soaring inflation across the globe.

Sources said two precautions were primarily taken before the order was made public.

First, the order was signed only around mid-night since by then the media in the country would have gone to bed, said two independent sources in the know of all developments. 

The second and most important precaution taken was to ensure the order was made public only after the US markets and banks closed.

“Had the order been released when the US markets and banks were open, exporters could have easily opened letters of credit for at least one million tonnes or even more,” said one of the two sources. 

Exporters’ overconfidence

“When we got a wind of the order and called up a staff involved in putting out the order, we were told that he got back at 5.30 am only on Saturday morning. I had to cut short my conversation by just confirming that wheat export had been banned,” the second source said. 

While in countries such as the US, banks are closed on Saturdays, banks in India were also closed on May 14 as it was the second Saturday. 

Trade sources concede that they were caught by surprise but agree that the Centre had taken the decision to ensure “food security for the country, its neighbours and vulnerable countries”. 

“There has been a heated debate within the traders’ community if wheat export could be banned, though some said a cap could be imposed from June. Exporters were a little overconfident, arguing that since a couple of corporates were actively involved in wheat exports, the Centre would not impose any ban,” said the second source.

PMO tracked the situation

According to a wheat miller, officials in the Food Ministry looked worried during a meeting with them on May 12 (Thursday).

“There were indications that the Prime Minister’s Office was tracking the whole issue closely particularly after wheat procurement by the Food Corporation of India dropped by over 50 per cent and reports pointed to a lower-than-expected production this year,” the miller said. 

“There were indications that the Centre could act anytime on the wheat issue after Prime Minister Narendra Modi spent at least one hour in discussing the grain’s production, procurement and exports with officials soon after he returned from his European visit,” the second source said. 

A grain exporter said though shippers could have been taken by surprise over the “surgical strike”, they would agree with the Centre’s decision if they closely look at the situation developing with regard to food commodities across the globe. 

Galloping fertiliser prices

Some of the stakeholders in the wheat sector say the Centre’s decision could have been swayed by the global developments on the food front.

One of the problems that farmers currently face across the world is high fertiliser prices, mainly due to soaring energy commodity prices. 

The use of nitrogen, phosphorous and potassium (NPK) fertilisers is crucial for plant growth, yield and production. However, fertiliser prices have soared since February 24, when the Ukraine war broke out.

Analysts say over 95 per cent of nitrogen fertiliser is produced using natural gas. Prices of natural gas have doubled after the Russia-Ukraine conflict and in the futures market, they are ruling four times higher. 

As a result, nitrogen fertiliser prices are up five times over the past three months at $1,000 a tonne currently, while potassium prices have more than trebled to $700 and phosphorous rates have nearly increased three times to $700.  

Potassium and phosphorous prices are likely to rule higher even if the war were to end today since Russia controls 10 per cent of the global phosphate supply and 25 per cent of the potassium supply.

Sanctions against Russia by the Western nations led by the US and its allies are likely to keep prices elevated, analysts say. 

Sowing may be low this year

Against this backdrop, the sowing of key food crops such as wheat could be affected as farmers would rather go for lower acreage than spend more on fertilisers. Besides, farmers in Russia and Ukraine would not be in a position to fully revive cultivation.

“Higher crude oil prices are a dampener for agriculture since they push up production costs,” said an exporter, justifying the “course correction” by the Centre to ban wheat export than try and promote it aggressively.

Wheat millers say the ban will not affect growers adversely as prices are still ruling above the minimum support price (MSP) of  ₹2,015 a quintal, though they dropped by ₹100-150 soon after the ban was imposed.

However, the ban has resulted in global prices flaring up by five per cent on Monday morning to $12.37 a bushel ($454.47 a tonne).  “Growers will definitely get prices above MSP,” said a South-based wheat miller.

Analysts say India could still help neighbouring countries such as Bangladesh, which accounted for half of India’s record exports last fiscal, Nepal, Sri Lanka and Afghanistan.

The Centre could even supply to African countries which might face food shortage later this year as they look more vulnerable with supplies from Russia and Ukraine being halted due to the war. The government’s order banning wheat export also makes a mention of this.

Avoiding a repeat of 2004-08

Stakeholders point out a key statement by Food Secretary Sudhanshu Pande made to the media on May 13. He said, “though wheat availability is not a problem, the “unregulated trade” is pushing prices up”.  

Sources said when the Centre itself had looked at exporting not more than 10 million tonnes (mt) of wheat, what was the need for the private trade, including multinational trade houses, to hold nearly 18 mt stocks in warehouses. They indulged in “speculative trade”, they said.

An exporter said the “course correction” by the Centre was also to avoid a situation that the country faced during 2004-08.

India exported wheat during 2004-05 at a very cheap rate of below $150 a tonne as a feed. However, it had to import the grain at higher costs then, even topping $325 a tonne for a few consignments. 

A New Delhi-based analyst said the Centre has to take precautions to ensure the ban doesn’t give way to any irregularities as it had happened in 2005 when pulses exports were banned, in 2007 when rice shipments were barred and in 2017 when pulses imports were banned. 

“In 2005 and 2007, a few trading houses manipulated the system to favour them.

A few of them even tapped the government-to-government export arrangements and struck deals with African countries to ensure they exported rice.

This time, the Centre has to ensure such things don’t recur and also watch out for letters of credit being opened in tax haven nations,” the analyst told BusinessLine on condition of anonymity.

Published on May 16, 2022
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